Molson Coors Beverage Company (TAP) Earnings Call Transcript & Summary

Lauren, I mean that's a really topical question actually because I'm coming up for 1 year in the job. And we announced our revitalization plan in October of last year, and it had 5 pillars. And some of them are different. We've made more progress on some than others, given the pandemic. So let me just take you through that quickly. So from an organizational design point of view, we couldn't have started that at a better time. We've shrunk from the 4 business units to the 2 business units. We've closed the corporate headquarters. The 600 folks that are going to leave the organization have, by and large, left. And we've filled a lot of the vacancies. And so our whole cost savings program is well on track. So I'm very pleased with both the timing of that and the fact that we've got that done through the pandemic. The second -- or actually it was the fourth, fourth pillar was building capability. And there, we've made progress. We're building out our data and analytics team in Tracey's world. We've built out our in-house agency, which is more effective and it's more efficient. And we've certainly spent a lot of time and effort building out our digital capabilities. So again, well pleased with the progress that we've made there. And then if you look at the 3 other pillars, which was supporting our 4 brands, I talked a little bit about how that -- how we changed that during the second quarter, given the circumstances. But the segment share growth for both of those brands continues at pace, and I'm very pleased with the performance of Coors Light and Miller Lite in the face of, a, a pandemic, and b, the seltzer craze, which has not taken a super amount of volume away from the premium lines at all. The next 2 pillars are arguably really important for us, which is the above-premium and the beyond beer. And in above-premium, we've got a real success story with Blue Moon LightSky. And as I said, we're selling everything that we can make. And Blue Moon has been a surprise for us as well in the off-premise. It's a very large on-premise brand. But as I said, consumers are going back to brands that they know, they love and they trust. And Blue Moon in the off-premise has done remarkably well for us. And you can see that in the Nielsen numbers. So in the above-premium space, the only negative for us really was Saint Archer Gold, where just the circumstances of everything about how we were going to bring that brand to life around consumers and consumer interactions and in-person tastings and so on, well, obviously, they just evaporated overnight given the pandemic. So we've put that brand in hibernation. We also closed on our Atwater brewery, which brings spirits capability. It will bring us a nice seltzer and also bring us a craft brand for us in a part of the world where we didn't have one. So generally pleased with the progress we've made on above-premium. And then beyond there, we've done a lot. We've launched our first RTD THC-infused products in Canada. We've formed a joint venture in Colorado for CBD. We've got our first wine, canned wine out there, Movo in test, and we'll expand that next year. I told you about the 4 new nonalcoholic brands we've got through L.A. Libations. We've signed a deal with a seltzer company in Europe. And yes, a lot of activity going on in beyond beer as well. So by and large, I look back at the last 11 months, despite the fact that we've lived through a tragedy in our Milwaukee brewery, we've lived through -- or we are living in a pandemic and then all the disruption around, from a social justice point of view, I'm very proud of our team and the progress that we've made, Lauren. I think we've made a lot of progress.

Yes, absolutely. I guess we didn't -- with that as the backdrop, what kind of metrics are you working towards for the role that above-premium plays as you build back to top line growth? Is there a sort of certain growth rate or size? Or how should we think about -- and this thing I've had trouble putting the pieces together, and I want to, right? How does it all add up to getting the total portfolio to growth? And how does this also with organic versus inorganic brand development, big versus small brands, kind of the end -- I guess, there is no end state, but where we're trying to get to through all these initiatives?

Yes. Look, obviously, we have internal metrics, Lauren. And our above-premium portfolio is about 10% of our business. And obviously, we're not satisfied with it. That needs to be much more. Europe is a fine example of how that can be done in our world, where it was very much a mainstream-focused and budget be a focused operation. And over the last 5 years, they've managed to get their above-premiums up to about 1/3 of their portfolio, and we're a long way off that in North America, which is why the above-premium and the beyond-beer legs are so important to our overall revitalization plan strategy. So we're, I don't know, we're at about 10% right now. And obviously, we want to be much, much more than that. All of them -- not all of them, 95% of our innovation is focused on above-premium and beyond beer, higher net sales per hectoliter brands and higher-margin brands. And I've given you an illustration of what those are. And it's the Vizzys, it's the Coors, Celsos, it's the Movos and so on.

Yes. Okay. I want to go back to the question around kind of new ways of working in the revitalization plan and the degree to which this crisis has sort of highlighted new opportunities. So to Tracey, the revitalization plan was already targeting inefficiencies in the cost structure. It was $600 million in aggregate savings you'd identified to address 2020 to 2023. Are sort of new ways of working through the crisis uncovering incremental areas of potential savings that you're willing or able to talk about even at a high level at this point?

Yes. So thanks, Lauren. Look, I think the coronavirus has allowed us to look at things a little bit differently. So yes, Gavin mentioned, one of the pillars of our revitalization plan was around the cost savings. And again, we're making great progress against that. But there are other things that have just happened because of this environment that we are working under. That's given us pause to think about how do we operate in a new environment, whatever that new environment is. And one of the areas is travel and entertainment, for example. So we're a marketing brand-led company, and we got sales folks all over the place that travel all the time. We've got corporate-type people that have to visit breweries and sales offices and et cetera. So we saved a lot on travel and hotels and things like this during the last 5 or 6 months. I think what we're seeing with use of technology is that potentially, we don't need all of that travel because just like this technology that we're using now, we use Teams at Molson Coors, and it's great. And we're probably meeting more with this new technology than we were when we were in person because we're saving time. We're not sitting on airplanes and that type of thing. So I certainly think that with technology, things like travel and entertainment are going to become structural. And we're not going to get back to the same levels of travel that maybe we were. But also from a technology point of view, you've got all of these vendors that are all competing with this type of technology, and prices are dropping and some of the technologies were free, whereas we were paying for things like video conferencing and that type of thing in the past. And now most of the stuff is free. So I see a savings from things like travel and entertainment, and I see a thing -- a savings from licensing of technology and that type of thing as well. And we're certainly going to go hard after things like that and just identify new cost savings, as we learn more about how to operate in this very different environment that we are operating in.

Okay. That's great. And let me just -- we'll stick with you and ask a question on balance sheet and capital allocation. So ended the second quarter with trailing 12-month leverage of 3.4x, will be stepping up spending in the second half. So should we expect that ratio to kind of go up before it goes down, just thinking through the match of putting money back into the business and sales recovery?

Yes. So without giving specific guidance, just a couple of things to think about. So on our Q2 call, we did speak about the fairly large benefit that we had received from a free cash flow point of view because of the delay in certain tax payments, both in the U.K. and North America. So payroll taxes and excise taxes and debt payments, et cetera, we were able to delay a fair amount of that effect at Q2. It was about $500 million that benefited our cash flow. Now we do expect to have to pay the majority of that by the end of this year. There is a small amount that we'll be able to move into next year, but the majority will reverse in the second half of the year. So that's a headwind from a free cash flow point of view, just to consider. The other, I guess, 2 items that will play into it, as we said, we do expect to increase our marketing in the back half of the year versus last year against our core brands as well as against our innovations that Gavin spoke about. So we intend to increase marketing. And then from a G&A point of view, just another thing to consider in the back half, we also mentioned this on the Q2 call, is that we did have some favorable onetime items last year in 2019 that we're now going to be cycling. So without specifically giving you leverage ratios or our forecast leverage ratios, I'll just tell you to consider that. Yes, that probably answers that.

Okay. Okay. And you have mentioned several times the importance of remaining investment grade. I think I get as an equity analyst, but I do get the question why this is a focus and a priority for you guys. So if you could just discuss that, and as you think about capital allocation priorities ahead, particularly time line for resuming the dividend. That would be 2 other questions that I have on that front.

Sure. So look, investment-grade rating is important to us for a number of reasons. Firstly, if you have a look at our debt, we've got long tenure debt at very low rates. In fact, I think when we raised the debt for the acquisition of the other 58% of the Miller-Coors joint venture, I believe we issued debt at the lowest rate that a company of our investment-grade had ever issued. So our bondholders are really important to us. And making sure that we are able to maintain our investment-grade rating means that a lot of them that can only hold investment-grade rating paper can continue to hold us. If we were to go sub-investment grade, it would probably mean that they would need to sell our debt. They'd probably sell it at a loss. That would be a problem, obviously. But also, if you have a look at history where companies have lost their investment-grade rating, it takes many years to get that investment-grade back again. So that's something we consider. During this pandemic, what was really important for us as well was we were able to access the commercial paper market. And being sub-investment grade, you're not able to get commercial paper. So having that access to commercial paper, having access to very low cost debt, having access to things like revolving credit facility at, again, very low rates is all part of the reason for why investment-grade rating is really important to us. So as we looked at debt and having a look at our liquidity, 2 objectives during this pandemic was: number one, making sure that we had adequate liquidity, and so I think I've spoken about that. The investment grade helped us to have that liquidity, but also positioning our business for the long-term success. And so we've been able to make sure we have adequate liquidity but also make sure that we still can invest behind our brands. And so we've spoken about the increase in marketing, et cetera. We've spoken about putting in additional capital for seltzer capacity in our Fort Worth brewery. So we're doing all of those things that are going to make sure that we're positioning the business for long-term success. So all of the actions we've taken, whether it be cutting the CapEx or suspending the dividend or around our liquidity, has made sure that we're not doing anything negative for the long term. Now one last point. Obviously, suspending our dividend was not an easy decision. We announced that in May and we announced that we're going to suspend for the remainder of the 2020 year. But as we look at our equity investments and our long-term shareholders, obviously, dividend is important. We've paid dividends for many, many, many years. And so as we get a little bit more certainty towards the back half of this year, we are talking to our Board, running various scenarios with them so that we can come back and talk about when and how we're going to reinstate our dividend going forward.

Okay. That's perfect. I think we're just up on time. So that is perfect. I want to thank you all for joining us. This is really great. So great the conference goes well. It was great to see you all, and I hope we get to do it in person for real in the not distant future.

Thanks for having us, Lauren, and we echo that sentiment for sure.

Yes. Yes. It'd be good to see you.

Thanks, Lauren. Keep well.

Okay. Thanks. You, too.

Bye.